Insurers say nation's market wide open
Post-Soviet consumer skepticism and Ukraine’s weak legal system have prevented the domestic insurance industry from winning over Ukrainian consumers, insurers say. But in the last two years, confidence has increased and so has activity on the market.
Local companies collected Hr 4.442 billion in insurance premiums last year, a 46 percent increase over 2001. And insurers say that 2003 will continue the positive sales trend.
Industry insiders, however, caution against calling three years of increasing sales an indicator of market growth. The figures don’t fully reflect the real situation, they say.
“It seems that the market is developing with huge speed, but that’s not the case. In a country like Ukraine, the market is very small. It’s in an embryonic stage even when compared with the rest of Eastern Europe,” said QBE Ukraine General Director Oleh Sosnovsky.
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| Ostra-Kyiv Chairman Ihor Gordienko (Olexy Boyko) |
Nationwide, the industry collects no more than 200 million euros a year in legitimate insurance premiums. The use of so-called financial operations by businesses and insurers make it appear that the industry is far larger than it actually is.
“Financial operations” are ostensibly legal schemes that businesses use to reduce their taxable income. They pay a huge tax-deductible premium, supposedly for insurance. Most of the premium is later rebated to the business.
Sosnovsky said that the financial operations schemes account for up to 80 percent of the premiums that the insurance industry reports each year. Ostra-Kyiv Chairman Ihor Gordienko places the figure at closer to 50 percent.
The industry’s inability to separate genuine insurance business from the various shadowy tax-avoidance schemes is indicative of its undeveloped state, and of the nation’s underdeveloped regulatory environment as well.
Actual insurance premiums have risen annually at between 15 percent and 20 percent, a rate that insurers find hopeful.
As the public becomes more affluent and more goods are sold on credit, the insurance industry will likely grow as well, said Nadra Insurance Company Chairman Ihor Artsimovich.
“Banks have started making auto and real estate loans, which is good for the industry because banks demand that clients insure the property,” Sosnovsky said.
The development of more private enterprises has also contributed to the growth of the insurance market, he said.
“There was little demand for insurance [during the early 1990s] as there was no private property,” he said. “Privatized companies are more enthusiastic about spending money for insurance, but it’s still impossible to entice state-owned companies to insure their assets.”
Premium rates are growing with the market, said TAS Deputy Chairman Serhy Babich. After the Sept. 11 terrorist attacks and natural disasters in Europe, insurance companies worldwide raised premiums.
“If insurers were trying to lure customers with low rates, now they’ve set rather high rates,” Babich said. “It’s a positive trend and shows that an insurance culture is forming.”
In the West, life insurance is the industry’s best-selling product, property and automobile insurance account for 70 percent of the business in Ukraine. And auto insurance has huge potential. Analysts say that only about 5 percent of the nation’s vehicles are insured. That number could skyrocket is parliament passed a compulsory auto liability insurance law. A bill has been submitted.
The country needs better laws to regulate the industry and to ensure that insurers are viable and solvent. At the beginning of the year, 338 insurers were registered in Ukraine, most of them small companies. Sosnovsky hopes this number will decrease in the future.
“Most of the companies are small and unreliable. I doubt that such companies would be able to meet their obligations in the event of a loss.”
Another round of insolvencies – even of small companies – would set the industry back, he said. That “would undermine people’s trust,” he said.
And trust is one of the industry’s most valuable, if intangible, assets. Ukrainians’ trust in the Soviet Union’s giant Gosstrah insurance company collapsed along with the company during the early 1990s. That blow was followed by the emergence of dozens of small, barely solvent insurers during the early days of independence. When many of them failed, what little faith the public still had in insurance companies dissipated.
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| Vadym Horenko, director of Ingosstrah’s representative office in Kyiv (Andry Porokhnenko) |
Given better laws, Artsimovich said that the industry would be able to build a more positive public image and bolster consumer confidence.
During late 2001, parliament gave foreign companies the right to operate in the country. Nonetheless, many foreign companies have been wary of entering the market.
It may be a further sign of the industry’s state that insurers are actually asking for more government regulation. They want the State Financial Services Regulatory Commission to oversee the enforcement of government regulations, helping to boost the industry’s reputation and encourage foreign investors to enter the business.
“If the industry were to receive state support, there will be a boom in life insurance in particular within a few years,” Sosnovsky said. “Within five years we’ll have a rather developed and civilized market compared to the present.”
Artsimovich also sees huge potential in life insurance. Only about one-half percent of all premiums collected by Ukrainian insurance companies in 2002 were for life insurance.
Gordienko predicts that the tiny life insurance market could increase by 30 percent per year.
“But it’s not easy to restore trust and it is too early to talk about the serious development of life insurance. It won’t happen for at least four years,” Gordienko said.
The industry is dominated by fewer than fifteen major players, including Oranta, Harant-Avto, ASKA, Ostra-Kyiv, TAS, Etalon, Kredo-Klassik, Ukrinveststrah and Nadra. Foreign firms may enter this top list in the future.
Russian firms have been steadily increasing their percentage of ownership in Ukrainian insurers and are still making moves to enter the market. Additionally, Western investors are behind QBE Group, Alico AIG Life and Polish Reinsurance Society.
“The market is wide-open but very small; foreign investors are waiting until annual premiums exceed $1 billion,” Artsimovich said.
Ingosstrakh, A Russian insurer, has opened a representative office in Kyiv with an eye on the country’s growing market. Ukraine Director Vadym Horenko said that the domestic market’s growth made the country an attractive place for Ingosstrakh to expand. He said that while Russia’s market has been nearly saturated, Ukraine’s is poised for growth.
Despite its growth potential, Horenko said that it’s not likely that Western-based multinational companies will arrive anytime soon.
“Foreign companies are not interested in the Ukrainian insurance market because it is still very small,” he said. “The whole market collects less in premiums in a year than one big Western insurance company.”
Sosnovsky agrees.
“Foreign insurance companies are not lining up, waiting to enter Ukraine,” Sosnovsky said. “Foreign companies don’t think it’s reasonable to invest in the unstable Ukrainian market.”
Meanwhile, in expectation of market consolidation and an influx of foreign capital, domestic companies are fine-tuning their approach to insurance.
“We’re waiting for foreigners to come and we’re trying to develop our business to correspond to the demands of experienced Western customers,” Artsimovich said.
